KARACHI, May 31: The State Bank of Pakistan on Saturday highlighted the importance of productivity improvements for arresting the rising inflation, but said restoring price stability may prove challenging in the short-run.

The CPI inflation at 17.2 per cent Year-on-Year in April 2008 was the highest level in a month since April 1995.

The central bank in its third quarterly report for 2007-08 stated that at least a part of this was driven by domestic supply-shocks that have compounded the impact of strong aggregate demand, and high international commodity prices which had continued to rise, and the pass-through to the domestic consumers was increasing; administered prices were increasing, wages were facing upward pressure, and imported inflation was on an uptrend.

“This clearly indicates that restoring price stability in the short-run may prove challenging. Even fiscal measures - tariff cuts and subsidies - aiming to at least partially protect the broad populace from rising food and energy prices, are likely to prove unsustainable, given the already large fiscal deficit,” it said.

The SBP suggested that any such measures needed to be carefully targeted at only the very poor and vulnerable.

In this environment, the report observes, it becomes all the more important that monetary policy be calibrated to squelch demand-led inflationary pressures in the economy. It also noted that over the last six months, expansionary fiscal policy had overshadowed and substantially weakened the impact of sustained monetary tightening.

The report said that with food and petroleum imports constituting more than half of the rise in imports, there was a limited scope for import compression in the short-run.